Don't let it get away!

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. As part of an ongoing series, I'm looking today at 10 measures to show whether AstraZeneca (NYSE: AZN) makes a great retirement-oriented stock.

Many pharmaceutical companies have made dramatic transformations of their business in order to adapt to changing industry conditions, but AstraZenecahas been somewhat late to the game. Can the drug giant catch up and develop a winning strategy? Below, we'll revisit how AstraZeneca does on our 10-point scale.

The right stocks for retirees With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.

Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.

Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.

Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.

Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at AstraZeneca.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$57.8 billion

Pass

Consistency

Revenue growth > 0% in at least four of past five years

4 years

Pass

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.28

Pass

Worst loss in past five years no greater than 20%

(0.5%)

Pass

Valuation

Normalized P/E < 18

10.63

Pass

Dividends

Current yield > 2%

6.0%

Pass

5-year dividend growth > 10%

8.4%

Fail

Streak of dividend increases >= 10 years

9 years

Fail

Payout ratio < 75%

58.2%

Pass

Total score

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at AstraZeneca last year, the company has lost a point, as dividend growth slipped below the 10% mark. The stock has also struggled, posting roughly break-even results over the past year.

AstraZeneca has many of the attractive qualities that draw investors to pharma stocks, including a high dividend yield and defensive characteristics that serve it well during tough economic times. Yet with the company having struggled in recent years from the loss of patent protection on schizophrenia drug Seroquel, AstraZeneca decided to changed direction last year, replacing former CEO David Brennan with Roche COO Pascal Soriot.

One reason for concern is AstraZeneca's weak drug pipeline. Rivals Sanofi (NYSE: SNY) and Bristol-Myers Squibb (NYSE: BMY) have done an excellent job of bringing new drugs through the development process, giving them both well-diversified drug portfolios that decrease reliance on blockbuster drugs for their income. Yet as AstraZeneca's blockbusters Nexium and Crestor approach patent expiration in 2014 and 2016 respectively, disappointing results from its phase 3 rheumatoid arthritis treatment fostamatinib are just one symptom of the relatively barren stable of good prospects in its pipeline, making research and development more crucial than ever.

But earlier this week, AstraZeneca announced a substantial restructuring plan to concentrate its R&D activities in three sites, with a new U.K.-based global headquarters in Cambridge to go with R&D facilities in Sweden and Maryland. The move will lead to U.S. job cuts but should produce cost savings beginning in 2016. In doing so, it hopes to duplicate the success of rival GlaxoSmithKline (NYSE: GSK) , which divided its R&D activities into two groups that focus on different therapeutic areas.

For retirees and other conservative investors, a high dividend yield and solid payout growth looks attractive. With huge changes coming, AstraZeneca poses a bit of a risk, but if the changes result in pipeline improvement, then they should pay off for investors in the long run.

Keep searchingFinding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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